No disallowance of interest U/s. 14A if no borrowed funds were utilized for investments

Essel Mining & Industries Ltd. Vs DCIT (ITAT Kolkata)

From the perusal of the balance sheet of the assessee it was found that assessee was having sufficient own funds at its disposal for the purpose of making investments and accordingly it could be held that no borrowed funds were utilized for making investments. Hence, there could not be any disallowance of interest under second limb of rule 8D(2) of the rules read with section 14A of Income Tax Act, 1961.

FULL TEXT OF THE ITAT JUDGMENT

1. This  appeal  was  earlier  disposed  off  by  this  tribunal  in  ITA  No. 786  & 2073/Kol/2013 (cross appeals) for the Asst Year 2008-09 vide order dated 10.3.2017. Later  a  Miscellaneous  Application  was  preferred  by  the  assessee  in  M.A.No. 108/Kol/2017 for non-consideration of the tribunal decision passed in assessee’s own case with regard to the issue of disallowance u/s 14A of the Act.  This Miscellaneous Application of the assessee was disposed off by this tribunal in M.A.No. 108/Kol/2017 dated 10.11.2017 by holding as under:-

1. In view of the above we hold that the mistake apparent from the record has occurred in the order passed by this Hon’ble ITAT in pursuance to the provisions of section 254(2) of the Act.  We therefore recall the impugned order for the limited purpose of adjudication of the disallowance made by the AO under section 14A of the Act.  Accordingly the registry is directed to fix the case for hearing in due course of time. Hence the ground filed by the assessee in Miscellaneous Application is allowed.

2. Accordingly, this appeal was refixed for this limited purpose of adjudication on the issue of disallowance u/s 14A of the Act and was heard on 26.4.2018.

3. The brief facts of the issue of disallowance u/s 14A of the Act are that the assessee is a  limited  company  engaged  in  the  manufacturing  business  of  rising  of  ore, manufacturing of nitrogen gas and ferro alloys, trading of iron ore and ferro alloys, generation of electricity (wind mill) and railway siding for captive use.  The assessee in the year under consideration earned dividend income of Rs 7.10 crores which was claimed as exempt u/s 10(34) of the Act.  The ld AO questioned the assessee for invoking the provisions of section 14A of the Act read with Rule 8D of the Rules.  The assessee replied as under:-

a) There was no direct expenditure incurred in earning the aforesaid dividend income as the dividend was received in the bank directly.

b) There was no borrowed fund used in making the investment therefore the question of interest disallowance does not arise.

c) The assessee for the administrative expenses has made the disallowance of Rs 5.97 lacs and submitted the details of the same in separate annexure and stated that 4 persons salary has been allocated to this.

However, the ld AO rejected the contention of the assessee by observing that the law does not make any distinction for the disallowance u/s 14A of the Act in a  case where the dividend was credited to the bank directly. Accordingly the ld AO invoked the provisions of Rule 8D and worked the disallowance as under:-

This action was confirmed by the ld CIT A. Aggrieved, the assessee is in appeal before us on the following grounds:-

1. For that on the facts and in the circumstances of the case, the CIT(A) erred in upholding the disallowance of Rs. 17,15,98,000/- made by the AO u/s 14A of  the Income Tax Act even though the authorities below had not established any nexus between incurring of the expenses of such magnitude with earning of tax-free income.

2. For that on the facts and in the circumstances of the case, there having been net reduction in the “Investments” during the relevant year from which the tax exempt income was earned and in the years of making investment there being no finding recorded by the AO that the investments were made out of borrowed funds, the authorities below were unjustified in law in disallowing part of the interest paid by invoking provisions of sec. 14A of the Income Tax Act.

3. For that on the facts and in the circumstances of the case and without prejudice to Ground Nos. 1 & 2 above, the authorities below were unjustified in law in not considering the interest disallowed by the appellant in the computation of total income while invoking provisions of Sec. 14A of the Income Tax Act.

4. We have heard the rival submissions and perused the materials available on record. We find from the perusal of the balance sheet of the assessee that the assessee is having sufficient own funds at its disposal for the purpose of making investments and accordingly  it  could  be  held  that  no  borrowed  funds  were  utilized  for  making investments.  We find that this factual issue had already been considered in assessee’s own case by this tribunal in ITA No. 589/Kol/2011 dated 20.5.2016 for the Asst Year 2007-08 had categorically held that all the investments were made only out of own funds of the assessee and not out of borrowed funds.  Hence there cannot be any disallowance of interest under second limb of Rule 8D(2) of the Rules.  We find that during the year under appeal, the same old investments were brought forward from earlier years.  Moreover, the profits of the assessee for the year also has increased during this year and investments had decreased during the year.   We find that this issue is also covered by the decision of the Hon’ble Jurisdictional High Court in the case of Pr.CIT vs Rasoi Ltd in G.A.No. 633 of 2016 .  The Jurisdictional High Court after considering the judgement of the co-ordinate bench in Dhanuka & Sons reported in 339 ITR 319 (Cal) had observed as under:-

“It appears for both the assessment years the Appellate Authority held that there was no finding of direct nexus between the borrowed fund and investment in shares.  The assessee’s own funds were far in excess of the average total investments.  There could not be any presumption of utilization of borrowed funds.  Hence disallowance under section 14A read with Rule 8D(2)(ii) was deleted while disallowance of indirect expenses of Rs 1,82,346/- by application of Rule 8D(2)(iii) upheld with the direction to allow relief of the sum already disallowed by the appellant itself.

On appeal preferred by the Revenue the Tribunal held as follows:-

‘We   have   heard   rival   submissions   and   gone   through   facts   and circumstances of the case. We find that now the revenue could not establish that the investments made in shares giving exempted income is out of borrowed funds on which interest is paid by assessee. There is no nexus whatsoever. On specific query Ld.Sr.DR could not controvert that the assessee has made in investment in shares giving exempt income out of own funds which is at about 2429 lacs and investment is at Rs 365 lacs only.  Once this fact has not been denied and CIT(A) has categorically observed that the assessee has made investment in shares out of its own funds  no  disallowance  can  be  attributed  qua  the  interest  paid  on borrowed funds for investing the same in interest free funds.  In view of the above, we confirm the order of CIT(A) on the common issue……..’

We  find  that  this  case  has  yielded  concurrent  finding  of  facts  regarding expenditure incurred by the assessee for the purpose of earning the exempt income, by the Appellate Authority and the Tribunal.  As such there is no scope for interference with such concurrent findings of facts.  We, therefore, are not satisfied that the case involves any substantial question of law.  The application and appeal are thus dismissed.”

4.1. We find that the own funds of the assessee for various asst years together with the value of investments are as under:-

Hence the ratio laid down by the Hon’ble Jurisdictional High Court in Rasoi Ltd supra would squarely apply to the facts before us. Respectfully following the same, we hold that no disallowance towards Interest under second limb of Rule 8D(2) of the Rules is warranted in the facts of the instant case.

4.2. With regard to disallowance under Rule 8D(2)(iii) of the Rules, we hold that only investments yielding exempt income should be considered for the purpose of working out disallowance thereon, in consonance with the decision rendered by this tribunal in the case of REI Agro Ltd reported in 144 ITD 141.  Accordingly we direct the ld AO to recompute  the  disallowance  under  the  third  limb  of  Rule 8D(2)  of  the  Rules accordingly.  While doing so, he should  also reduce the disallowance already made by the assessee in the return of income.

5. Accordingly, the grounds 1 to 3 raised by the assessee are allowed for statistical purposes.

6. In the result, the appeal of the assessee on this limited aspect of disallowance u/s 14A of the Act is allowed for statistical purposes.

Order pronounced in the Court on 02.05.2018